The tax rate on your savings interest depends on your total income and filing status

Savings account interest is taxed as ordinary income, which means it uses the same tax brackets as your wages or salary. The federal tax rate you pay on interest ranges from 10% to 37%, depending on how much total income you earned that year and whether you file as single, married filing jointly, or another status. Your bank will report the interest to the IRS on a Form 1099-INT, and you report it on your tax return.

The amount of interest itself is usually small — a savings account earning 4% to 5% annually on $10,000 generates $400 to $500 in interest per year. But that interest still counts as taxable income. If you earned $50,000 in wages and $500 in interest, the IRS treats your total income as $50,500 for tax purposes.

State and local taxes also explore to savings interest in most places. Some states tax it at the same rate as federal income tax; others have a separate rate. A few states (like South Dakota, Tennessee, and Wyoming) do not tax interest income at all, but most do.

Key Takeaways

  • Savings interest is taxed at your ordinary income tax rate, which ranges from 10% to 37% federally depending on your total income and filing status.
  • Your bank reports interest of $10 or more on Form 1099-INT, which you must report on your tax return even if the bank does not send you a form.
  • State and local income taxes explore to savings interest in most states, adding another 3% to 10% or more depending on where you live.
  • Interest earned in a traditional IRA or 401(k) is not taxed until you withdraw it; interest in a Roth IRA is never taxed if you follow withdrawal rules.

How your tax bracket determines what you actually owe

Your tax bracket is the percentage of tax you pay on your last dollar of income. If you are single and earned $50,000 in wages in 2024, you fall into the 22% federal tax bracket. That $500 in savings interest gets taxed at 22%, meaning you owe $110 in federal tax on that interest alone.

The brackets shift each year and vary by filing status. A married couple filing jointly has higher income thresholds before entering each bracket, so they may pay 12% on the same $500 in interest that a single filer pays 22% on. The IRS publishes updated brackets every January.

This matters because it means the tax on your interest is not a flat rate — it depends on your total income picture. If you had a year with unusually high income (a bonus, a second job, investment gains), your interest gets taxed at a higher rate that year. If you had a lower-income year, the same interest amount gets taxed at a lower rate.

When your bank reports interest and what you need to do

Banks report interest of $10 or more on Form 1099-INT, which they mail to you and file with the IRS by January 31. The form shows the interest earned in the previous calendar year. You then report this amount on your tax return — usually on Schedule 1 (Form 1040) under "Interest" — when you file.

If you earned less than $10 in interest, your bank may not send you a 1099-INT, but you still owe tax on that interest. You report it anyway on your return. The IRS has records of what your bank reported, so if you do not report it and the IRS catches the discrepancy, you will face penalties and interest charges on the unpaid tax.

If you have multiple savings accounts at different banks, each bank sends its own 1099-INT. You add up all the interest from all the forms and report the total on your return.

Tax-advantaged accounts that shelter interest from federal tax

Interest earned inside a traditional IRA or 401(k) is not taxed in the year it is earned. Instead, you pay tax when you withdraw the money in retirement. This means $500 in interest can sit in the account and grow without triggering a tax bill that year.

A Roth IRA works differently: interest is never taxed, even when you withdraw it, as long as you follow the withdrawal rules (generally, you must be 59½ and have held the account for at least five years). This makes Roth accounts particularly valuable if you expect to be in a higher tax bracket later.

A 529 college savings plan also shelters interest from federal tax if the money is used for may have access to education expenses. If you withdraw it for non-education purposes, you pay tax on the earnings portion plus a 10% penalty.

These accounts have contribution limits and income limits for some filers, so they are not available to everyone. But if you can use them, they are the most direct way to reduce the tax on your savings interest.

How state and local taxes add to your federal bill

Most states tax savings interest as ordinary income. If your state income tax rate is 5% and you earned $500 in interest, you owe an additional $25 to your state on top of the federal tax. Some states have higher rates — California, New York, and Oregon all tax interest at rates above 9% for higher earners.

A handful of states do not tax interest income: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. If you live in one of these states, you owe federal tax on your interest but no state tax. Some states tax interest at a lower rate than wages, but this is rare.

Local taxes (city or county) explore in some places as well. New York City, for example, taxes interest as part of its local income tax. You need to check your specific state and locality to know the full rate.

The difference between interest and other savings account earnings

Interest is straightforward: it is the money the bank pays you for letting them use your deposits. But some savings accounts also offer bonuses — a flat amount paid when you open the account or meet certain conditions. These bonuses are also taxed as ordinary income and reported on Form 1099-INT.

Dividends from a money market account or savings account are treated the same way as interest. The bank reports them on 1099-INT, and you pay tax at your ordinary income rate.

If you move money between accounts or withdraw your principal (the amount you originally deposited), that is not taxable. Only the earnings — the interest and bonuses the bank paid you — are subject to tax.

What happens if you do not report savings interest on your return

The IRS receives a copy of every 1099-INT your bank files. If you do not report the interest on your tax return, the IRS will eventually notice the discrepancy. You will receive a notice asking you to explain the difference or pay the tax owed, plus penalties and interest charges on the unpaid amount.

The penalty for not reporting income is typically 20% of the underpaid tax, though it can be higher if the IRS determines the omission was intentional. Interest accrues daily on the unpaid tax, compounding the longer you wait to resolve it.

If the interest amount is small (under $100), the IRS may not pursue it aggressively, but there is no may provide. The safest approach is to report all interest, even small amounts, on your return.

Frequently Asked Questions

Do I have to report savings interest if I earned less than $10?

Yes. Your bank only sends a 1099-INT if you earned $10 or more, but you owe tax on any interest you earned, no matter how small. Report it on your tax return under "Interest" on Schedule 1.

Can I deduct the tax I pay on savings interest from my taxes?

No. Interest income is added to your other income, and you pay tax on the total. You cannot deduct the tax itself. However, if you paid interest on a loan to buy investments, that investment interest may be deductible under certain conditions — consult a tax professional about your specific situation.

What if I earned interest in a joint account with my spouse?

The bank typically reports the full interest amount on one 1099-INT. You and your spouse should decide how to split it on your individual returns — usually 50/50 unless your account agreement specifies otherwise. Both of you report your share on your respective returns.

Does interest in a high-yield savings account get taxed differently?

No. A high-yield savings account pays more interest than a traditional savings account, but the interest is taxed the same way — as ordinary income at your marginal tax rate. The higher the interest rate, the higher your tax bill on that interest.

If I move my savings to a Roth IRA, do I owe tax on the interest that was already earned?

You owe tax on the interest in the year it was earned, regardless of whether you later move the money to a Roth IRA. Moving the money does not change the tax on past interest. Going forward, interest earned inside the Roth IRA is not taxed.